China May Refrain From Reserve-Ratio Cuts in Rest of 2012

By Bloomberg News -
Nov 19, 2012

China may refrain from cutting
lenders’ reserve requirements for the rest of the year after an
economic slowdown subsided and the central bank increased its
use of a separate tool to adjust funds in the financial system.

The People’s Bank of China will probably keep the reserve-
requirement ratio for large lenders at 20 percent, based on the
median estimate of economists in a Bloomberg News survey
conducted Nov. 14-19. That compares with the half-point cut
projected last month and the full point forecast in September.

The shift in projections reflects a second month of pickups
in industrial production and retail sales and the government’s
reluctance to boost stimulus more aggressively as a new
leadership headed by Xi Jinping takes office. The PBOC is using
so-called reverse-repurchase agreements to temporarily pump
money in and out of the banking system instead of the longer-
term measure of changing the reserve ratio.

“There won’t be any more moves” in the reserve
requirement, said Stephen Green, head of Greater China research
at Standard Chartered Plc in Hong Kong, who in October projected
a half-point cut. “You can provide the liquidity through open-
market operations.”

The government may lower the reserve ratio in the first
quarter of 2013, while analysts see no interest-rate changes
from now through the end of the survey period of the first half
of 2014, based on median estimates. The central bank last cut
interest rates in June and July and reduced the reserve ratio
three times from November 2011 through May.

Economist Forecasts

Twelve of 20 economists surveyed this month forecast no
change in the reserve ratio through the end of 2012. That
compares with six of 23 in the October survey.

Foreign direct investment in China fell for the 11th time
in 12 months, Commerce Ministry data showed today, as economic
growth teetered near a 13-year low and a territorial dispute
with Japan weighed on trade.

China’s economy expanded 7.4 percent in the July-September
period from a year earlier, the seventh straight quarterly
deceleration. Other data have shown signs of a pickup in
September and October: Industrial output climbed in October at
the fastest pace in five months, while retail sales and exports
rose more than estimated.

Some companies are reporting earnings gains. Beijing-based
Lenovo Group Ltd. (992) said Nov. 8 that second-quarter profit rose 13
percent as it expanded market share to overtake Hewlett-Packard
Co. in personal-computer shipments. The yuan has strengthened
0.8 percent against the dollar since the end of September
through yesterday. It rose 0.1 percent today to 6.2297 as of
10:57 a.m. in Shanghai.

Hu Yifan, chief economist at Haitong International
Securities Group Ltd. in Hong Kong, said China may cut the
reserve ratio in March. Before that, the PBOC will keep using
reverse repos to provide funds and help meet “traditionally
high demand” around the Lunar New Year holiday, she said.

Lending Policy

“It’s quite clear that interest-rate cuts are off the
table now, and even for a required-reserve ratio cut, it’s a
quite close call,” said Zhang, who previously worked for the
Hong Kong Monetary Authority. While Zhang is forecasting one
more cut in the ratio this year, “there is a good chance the
central bank will not do it,” he said.

China’s monetary policy may enter a period of “relative
silence” in the coming months while the new leaders ponder
economic-growth targets, Zhang said. If the government reduced
its annual gross domestic product expansion goal to 7 percent,
from 7.5 percent, that would mean “the end of China’s monetary
policy easing may come earlier than expected,” he said.